Looking ahead: How Suncor is responding to the low crude oil price environment and positioning for future success

Steve Williams, President and CEOAlister Cowan, EVP and Chief Financial OfficerAnnual General Meeting
April 28, 2016

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Steve Williams, President and CEO

Thanks Jim, and good morning everyone. Welcome to Suncor’s 2016 AGM here in Calgary, which I am pleased to acknowledge is located on the traditional territory of the Treaty 7 Peoples.

I’d like to start by expressing my appreciation to one of our Board members, Douglas Ford. As you heard, he will be retiring from our Board after 12 years of dedicated service.

Doug has brought a strong personal commitment, strategic thinking and a spirit of collaboration to Suncor. An active member of our Board, he’s served on various committees throughout his term. I’d like to take this opportunity to thank Doug for contributing to our success.

I’d also like to welcome our newest Board member, Patricia Bedient. Patricia is an Executive Vice President and former CFO at Weyerhaeuser Company, one of the world’s largest integrated forest products companies. She brings with her strong financial and strategic planning skills and we’re pleased to have her join the Suncor Board of Directors. Patricia, a warm welcome to you.

At our Annual General Meeting last year, I spoke about our company in the context of a lower oil price environment. I mentioned that resilience in responding to the drop in oil prices would be key. This past year has highlighted the importance of being resilient – especially since prices have remained lower for longer. Suffice to say, it’s been a challenging time for the energy sector.

The election of new governments at both the provincial and federal levels, increased focus on climate change and the ongoing debate about pipeline infrastructure made for a very dramatic year in the macro-environment.

Navigating all of this change hasn’t been for the faint of heart. For many in our industry, the implications have been significant. Some companies have had to make very difficult choices - in some cases, harvesting shareholder value just to survive. And some have not survived.

At Suncor, knowing we had to reduce capital and operating budgets, we’ve had to make some tough decisions, deferring projects, reducing costs and decreasing our staffing levels. None of these were made lightly and we were conscious not to impact our focus on safe, reliable and environmentally sound operations.

And while these decisions were difficult, particularly on the staffing side, we knew we had to make them and position the company to emerge stronger for future.

As we’ve said during our quarterly investor calls, our goal is to use this period to build an even stronger organization – a competitively advantaged company that’s poised to benefit significantly when oil prices recover.

In 2015, we continued our focus on cost management, a journey that was well underway before the decline in oil prices. Guided by aggressive cost reduction targets, we reduced or postponed discretionary and non-essential spending across the company.

We also collaborated closely with our suppliers and business partners. The sum of these efforts allowed us to reduce operating costs by almost one billion dollars – significantly more than the $600 million to $800 million target over two years we set for ourselves at the beginning of 2015.

We also took a hard look at our capital budgets. Projects such as the MacKay River Expansion and White Rose extension were deferred. However, we decided to continue to advance growth projects in-flight, such as Fort Hills and Hebron, knowing that these long-life projects are expected to provide strong returns throughout their life cycles. Both of these projects are expected to achieve first oil in late 2017. Fort Hills construction is over 55% complete, and Hebron continues to move at pace in terms of its project milestones.

Operational excellence remains a strong focus, helping us drive out costs, increase production and ensure the safe, reliable and environmentally sound operation of Suncor facilities.

Our efforts are paying off. Annual production in 2015 was 578,000 barrels per day – an 8% annual production increase, which put us in the upper range of our guidance for the year. We’ve also seen very strong contributions from our in situ operations. Firebag averaged just under 200,000 barrels per day over the last six months.

With strong infill well performance, advanced reservoir management and the completion of a minor debottleneck project, we’ve been able to increase the nameplate capacity of that facility to 203,000 barrels per day.

For us, operational excellence is about safe, reliable and environmentally responsible operations. It’s about strong, proactive, predictive maintenance programs. And it’s about well trained, engaged operators.

In 2012, we set a five year goal to achieve a 90% utilization rate at our upgraders in oil sands. I’m pleased to report we’ve achieved that in 2015 – two years ahead of target.

Our work in this area is helping us drive down costs. In 2015, average annual cash costs at oil sands were $27.85, a reduction of almost 18% from 2014. In Q1 of this year, we’ve been able to drive that even further to $24.25.

The high utilization rates we achieved in oil sands in 2015 were mirrored in the downstream, where our refineries maintained robust rates above 94%. That performance was accomplished despite significant planned maintenance being carried out across all our facilities.

With today being the Day of Mourning, we’re reminded that safety must remain a top priority as we carry out this work. It’s an ongoing commitment that’s as relevant today as it was yesterday, and will be tomorrow.

In the current economic environment, some might find it difficult to look forward with any optimism. And yet, it’s important to do so, because if there’s anything that the commodities business has taught us, it’s that both up and down price cycles are a reality in this business.

And, that companies that maintain a strategic approach can enhance their competitive position, returning value to shareholders in the process.

2015 saw us take some big steps, including completing a transaction to exchange our Kent Breeze and our share of the Wintering Hills power plants for TransAlta’s Poplar Creek cogeneration facilities. We also purchased an additional interest in the Fort Hills project from Total E&P Canada, which moved us into a majority ownership position of 50.8%. Later in the year, we initiated an all-share offer to purchase Canadian Oil Sands Limited. As you’ve heard, we recently concluded the deal, which will result in our stake in Syncrude increasing from 12% to 49%. And of course, yesterday, we announced the purchase of a further 5% working interest in the Syncrude joint venture from Murphy Oil Corporation’s Canadian subsidiary.

Operating and growing our business safely and responsibly happens within a broader societal context. And that dynamic continues to evolve. The challenge of climate change and how to address it figured prominently in the public mindset in 2015. I was pleased to see conversations evolve and some concrete steps taken this past year, putting us on the path to solutions.

Late last year, Suncor and other oil sands producers and members of the environmental community came together to find a way to make joint recommendations on strong climate policy to the Alberta government. As a result of this collaborative work, together we were able to support the Alberta government’s Climate Leadership Plan.

That plan calls for a broad-based carbon pricing regime, coupled with an overall emissions limit for the oil sands. It provides predictability and certainty on pricing and emissions. It helps us plan how to innovate and invest in technology to drive down our environmental footprint.

At Suncor, we share the global challenge to tackle climate change head on, by reducing emissions to become carbon competitive, while producing the energy that the world needs. Through a new environmental performance goal, we’ll harness technology and innovation to set us on a transformational pathway towards a low carbon energy system.

There’s no question that more work remains on the climate change file, but I think that through the Alberta government’s new and ambitious performance standard, we’re starting to change the conversation about energy and infrastructure. Our vision is to deliver energy that creates prosperity, ensures a healthy environment and promotes improved social well-being.

The Climate Change Leadership Plan is also a reminder that the best ideas come from thoughtful solutions-oriented dialogue from across the spectrum. I’m encouraged to see those interactions happening in a variety of places, including Canada’s Ecofiscal Commission where I serve as an Advisory Board member, and at the COP21 discussions which I attended in Paris as part of the federal government delegation.

The constructive path forward is also reflected in discussions about carbon risk. As you heard, we’re supporting NEI’s shareholder resolution calling for more transparency in this regard. We believe that shareholders and other stakeholders can benefit from understanding how Suncor is addressing the climate change challenge and how we will remain resilient in a world transitioning to a lower carbon energy system. And, we believe that it’s a wise use of resources to provide information beyond our current disclosure.

Our engagement doesn’t end with those concerned, as we are, about the environment. We recently launched a social goal, which is focused on improving our relationship with the Aboriginal Peoples of Canada. We’ll be doing that starting within Suncor, through partnerships with Aboriginal youth, and through mutually beneficial marketing arrangements and procurements. It’s early days, but we’re excited about the path we’re taking together.

As I look ahead, I remain confident in the strength of the company, its strategy and our future. That optimism rests heavily on a well-defined plan, focused on operational excellence, capital discipline and profitable growth, which allows us to deliver meaningful results for our shareholders.

As always, that’s backstopped by an outstanding team of leaders and employees that is able to effectively navigate the challenges and opportunities of an ever-changing world. The men and women of Suncor are a source of great strength for our company. I extend my appreciation to all of them for their hard work and dedication.

Their commitment to delivering results - day-in and day-out - is helping us to create energy for a better world. As I turn the floor over to Alister Cowan, our EVP and Chief Financial Officer, I’d like to thank you, the shareholders of this our company, for your continued support and confidence.

Alister Cowan, EVP and Chief Financial Officer

Thanks Steve. I’m pleased to be able to present Suncor’s financial results for the past year.

Steve has already pointed out what a dynamic year 2015 was, given the volatility of the oil price during the year and an expectation of a lower for longer crude oil price environment. Yet, despite the challenging environment, Suncor demonstrated a resilience that helped it stand out amongst its peer group. This was reflected in results that were driven by our operational and financial strategy. The financial strategy was aimed at:

increasing reliability and lower costs;

managing risk;

profitable growth and returns to shareholders; and

providing financial flexibility.

As Steve mentioned, 2015 was a very good year in terms of production, with annual volumes coming in at 578,000 barrels of oil equivalent per day. That included 115,000 barrels per day in E&P and a record 463,000 barrels per day in Oil Sands. Our strong refining utilization remains consistenly at the top end of peer performance, helping drive throughput of432,000 barrels per day.

Turning to our financial performance, cash flow was affected by lower oil prices, but remained strong in relation to others in our industry at $6.8 billion, reflecting the strength of our integrated strategy. We recorded operating earnings for the year of $1.5 billion, or $1.01 per common share.

The challenging business environment meant that we lost just under $2 billion on a net earnings basis, however that included a $3.5 billion charge relating to a couple of specific non-cash items;

a $1.9 billion charge in terms of the impact of the weaker Canadian dollar on our US dollar debt; and

$1.6 billion in asset impairments.

I want to point out that it’s our operating earnings and cash flow from operations which are the true reflection of the strength of our integrated model, the ongoing focus on controlling costs, and rigorous capital allocation.

The low price environment in 2015 reminded us of the importance of living within our means and being prudent in times of plenty. Our integrated business model, strong balance sheet and a disciplined approach to capital allocation have set Suncor up to emerge stronger from this downturn. The $6.8 billion in operating cash flow we achieved more than covered our sustaining capital of$ 2.6 billion and our dividends of $1.6 billion, leaving over $2.5 billion to invest in growth. With that, together with cash on the balance sheet, we were able to invest $3.6 billion in growth projects in 2015, which will deliver long-term sustainable shareholder value.

For us, having cash available to invest doesn’t mean we rush out to spend it. We remain steadfast in our commitment to exercise discipline in allocating capital. For example, we reduced our capital spending by over $1 billion versus the original 2015 plan, without impeding our ability to execute critical maintenance and key growth projects.

Discipline and prudence are the hallmarks of our financial strategy. We see the benefits of these today and they will continue to remain so in 2016 and beyond.

Going forward, you can expect more of the same:

living within our means;

not wavering from our disciplined capital allocations priorities;

maintaining the health of our balance sheet;

keeping a strong investment grade credit rating, one which is setting us apart from our peers.

Suncor continues to be recognized for our long life, low decline production and reserves, industry expertise, commitment to sustainable development, integrated business model, and of course, our financial strength.

We have demonstrated strong per annum production growth over the past five years, and will deliver substantial growth with in-flight projects through to the end of the decade, which again sets us apart from our peers, reaching 800,000 barrels per day production in 2019.

Our financial performance has allowed us to consistently return value to shareholders. 2015 marked the 13th consecutive year that Suncor has increased its dividend. I want to emphasize that our Board has indicated that it remains committed to ensuring that our dividends will be reliable, sustainable, meaningful and competitive.

We believe our dividend continues to provide an attractive return for our shareholders and is part of the company’s compelling investor proposition – growth and dividends, underpinned by a strong balance sheet.

Investors don’t have to look far to understand that this past year has been challenging for many of our peers. Thanks to a strong balance sheet, sound strategy and disciplined execution, Suncor has been able to successfully navigate the uncertainties of 2015 and improve our competitive position. And our team, led by Steve Williams, will be singularly focused on continuing that progress.

I too would like to thank our investors for your ongoing support, and with that, I’ll now turn the microphone back to Jim Simpson.